How are total risk, non-diversifiable risk and diversifiable risk related? Why is non-diversifiable risk the only...

How are total risk, non-diversifiable risk and diversifiable risk related? Why is non-diversifiable risk the only relevant risk?

Expert Solution

Tota Risk = Systematic risk + Unsystematic Risk

Total Risk = Non-Diversifiable risk+ Diversifiable risk

Risk as we now is the uncertainity present over our investments/portfolio over different asset classes.

Systematic risk is the risk inherent to the entire market or market segment ,It can not be diversified . This includes anything which impacts not only a particular investment but the whole set of assets . For example the sources of systematic risk could be macroeconomic factors such as inflation, changes in interest rates, fluctuations in currencies, recessions, wars .

Whereas the unsystematic risk is associated with some specific investment or industry or sector. This type of risk can be reduced by altering a portfolio with significant diversification so that a particular event does not affect the whole portfolio . It is also called market risk since the risk is associated with market conditions.

Non diversiafiable ie systamatic risk is beyond anyone control .It would be wrong to say that non-diversifiable risk is the only relevant risk as this risk cannot be diversfied to reduce the risk further.

HOPE IT HELPS. :)

jeff jeffy answered 2 years ago

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